As a beautiful summer spread across the
United States last July, beckoning travelers to do what Americans had been
doing by the millions since World War Two — that is, to hit the road — oil
prices were reaching $147 a barrel. Last summer, consumers gasped as prices at
the pump surged above $4 a gallon.
One result of this was that people did not hit the road. In a family SUV that gets 12 miles to the gallon, a 700-mile
vacation trip would have cost $231. Add to that motels, meals, entertainment,
and other traditional costs, and the vacation that Americans once took for
granted seemed suddenly to have receded out of reach.
This had an entirely predictable effect.
Oil is a commodity. Any time the price of a commodity goes up, people use less
of it. When people use less of a commodity, the sellers of that commodity
begin to have trouble finding buyers.
In this case, those who sell and
stockpile oil found that they had more of it than they thought. By the fall of
2008, the domestic demand for oil had fallen to under 19 million barrels a day,
the lowest level since June 1999.
For people who remembered their history,
there would be no surprise in the collapse of commodity prices. During the
second oil crisis that spanned the years from 1977 to 1985, the exact same
thing happened: People drove less, bought smaller cars, and as a result used
17 percent less oil. Overall, America cut its use of imported oil by
half. Predictably, the price of oil collapsed because of that flagging
demand.
Once the price fell, driving seemed
attractive once more. With environmental restrictions on exploration
tightening, supply inevitably fell short of demand. So, as people flocked to
the highways during the next 15 years, and people in countries like India and China
began to drive cars en masse, we gradually drove the price of oil back up by
demanding more and more of it.
Beyond the simple realities of supply and
demand, broader geopolitical forces drive oil prices as well. When Nigerian
militants blow up oil rigs, when Israel threatens war with Iran, and when
Russia invades its neighbors, all those forces create anxiety that drives up
oil prices.
But the behavior of consumers also has a
very powerful influence on the price of oil. The oil industry has historically
responded to high...
